Investing for Retirement: The Basics

10When it comes to investing for retirement, the rules are pretty basic. This is because retirement investing is about the long haul. It’s about the big picture, and creating a portfolio that is fundamentally sound for the long term.

As you work to build your nest egg, here are some things to remember about creating an investment portfolio that is more likely to be successful:

Invest Early and Often

One of the best things you can do to ensure that you are ready for retirement is to begin investing right now. It’s never too early to beging contributing to your retirement portfolio. And don’t forget to invest often. If you are investing in a tax-advantaged plan with limitations, do your best to max it out if you can. Then move on to taxable investment accounts, if you still have the funds available to do so.

The earlier you get started, the longer compound interest has to work in your favor. Plus, your portfolio will have to recover from market setbacks, improving its performance and smoothing out in terms of volatility over the long haul. If you have 20 to 30 years to build your nest egg, and to weather market storms, you will be in a better place later.

Pay Attention to Asset Allocation

One of the most important aspects of retirement investing is the asset allocation. You need to include more stocks in your portfolio when you are younger, and building up your wealth. As you approach retirement, shifting some of that asset allocation toward income investments makes sense, since you want to protect the capital you have amassed.

Your asset allocation should reflect your risk tolerance and your long term investing and retirement goals. This means that you need to periodically rebalance your portfolio, selling stocks and other investments as needed to make sure that your asset allocation remains appropriate for your situation.

Consistency

If you want to build your portfolio over time, it’s important that you remain consistent. Use dollar cost averaging to ensure that you keep adding to your account over time. Realize that you don’t need a huge amount of money to get started with retirement investing. A smaller amount, invested over time, can be quite effective.

One of the best ways to achieve the necessary consistency is to have the money automatically deducted from your paycheck and contributed to a retirement account. Even if you are self-employed you take advantage of automated savings. Have your money withdrawn from your checking account and used to buy investment shares automatically. It’s possible even for someone who is self-employed to open an IRA, or some other tax-advantaged retirement plan aimed at entrepreneurs.

Check Your Fees

Don’t forget to check your fees. If you have a 401(k) with your employer, the disclosure rules recently put into effect can help you pinpoint exactly how much you are spending on fees. Choose investments, when possible, that have the lowest possible fees. This includes expense ratios as well as commissions. Make sure that you understand the fees. If you find you are paying too much, switch to a similar fund with lower expenses.

You should also make sure to take advantage of any employer match you might be offered. Max out your matching contribution each month. Once that is taken care of, if the plan offered at your work has no desirable options, put the rest of your contribution money in an IRA (choose your own low-cost funds), up to the max possible.

Use a Retirement Calculator

Finally, make sure that you use a retirement calculator to get an idea of how much you will need to set aside each month to meet your goals. Realize that it probably isn’t realistic to assume returns of between 8% and 10% annually, even on stocks. Instead, be more conservative as you figure your requirement. It’s better to invest more than you need into retirement than to be caught short.

Your best bet is to start with a tax-advantaged account, since they offer you a good way to make the most of your investment, since you can accumulate wealth faster without taxes dragging on your returns.

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